Responsible Finance Forum

Implementing Client Protection in Microfinance

Daniel Rozas
01 September 2011
Source:  Center for Financial Inclusion
 The Smart Campaign

Recognizing a need to make the commitment to client well-being explicit and actionable, the providers, investors,donors, and support organizations that make up the microfinance community introduced the Client Protection Principles (CPPs) in 2008. The Smart Campaign was launched in 2009 to assist the microfinance industry in implementing the principles. The Campaign now has over 2,300 endorsers from 130 countries,including 700 microfinance institutions (MFIs).

After nearly two years, it is possible to begin to take stock of the Smart Campaign and, more broadly, of the state of client protection in microfinance. This mid-term report from the Smart Campaign has two main purposes.The first is to explain how the Smart Campaign and actors throughout the microfinance industry are working to move from initial awareness raising about client protection to capacity building, implementation,and finally certification. The second and possibly more important purpose is to provide a first look at how the microfinance industry is doing on the CPPs. That look is gleaned from the on-site assessments of CPP implementation at over 300 financial institutions. The assessments were performed by rating agencies, investors, and the Smart Campaign during the period 2008–2011. This is by far the most comprehensive data yet assembled on client protection practices at microfinance institutions, though it is a first cut. We expect the consistency and coverage of the dataset to improve significantly in future reviews.

The early news is heartening. The vast majority (88 percent) of all the financial institutions received passing marks, and these results also held for the two all-important principles, avoiding over-indebtedness and transparency.Given the nascent state of the Smart Campaign during the period when the assessments were performed,the scores cannot be attributed entirely to the Campaign. Rather, they reflect the rapid coming together of the microfinance industry around the CPPs, as demonstrated by the raters and investors that incorporated the CPPs into their assessments and the MFIs that sought to be assessed. The results show that a basic level of client protection performance is widespread in the practices of many MFIs.

Of course, the industry has significant room for improvement, and will continue to face critical challenges that it must respond to in the face of changing competitive conditions. This report provides some confidence that the microfinance industry has a positive base of pro-client practices to build on as it seeks to fully implement its commitment to client protection.